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Institutional madness and stricter regulation, how long can the "roller coaster" of Bitcoin last?

By Zhu Haoyu and Zhao Jiaxin     June 11th, 2021


Recently, Bitcoin has experienced the sharpest plunge in history. At the same time, governments all over the world have intensively released policies to strictly regulate virtual currencies in May. The People's Bank of China first issued a document on May 18 to ban bitcoin-related businesses; on May 26, the Inner Mongolia Development and Reform Commission issued eight measures to resolutely crack down on and punish virtual currency "mining" behaviors, soliciting opinions from the public.


Data from Coindesk, a virtual currency information platform, indicates that on May 19, Bitcoin fell below the $30,000 mark, plummeting more than 30% within a day, and a total of 670,000 people liquidated about $9 billion (about 58.5 billion yuan), creating the highest single-day Liquidation record; Compared with the highest price of Bitcoin in April of $64,829, it is now almost cut in half, falling back to the level in February this year. Affected by this, other popular virtual currencies such as "Dogecoin" and "Ethereum" were also sold in panic.


Guhe Media reviewed the two price fluctuations of Bitcoin from 2017 to 2021 and analyzed its institutional investors, investment scale, and government supervision. Professionals interviewed by Guhe Media believe that, unlike individual customers as the main force in 2017, the skyrocketing Bitcoin in 2020-2021 is mainly driven by institutional investors and the Federal Reserve's "big release". At the same time, the regulatory policies of various countries are becoming stricter. In this regard, professionals say that the anonymity of Bitcoin will also challenge the centralized supervision of the government.


What institutional investments are in the Bitcoin tide? How large is the investment scale?


Guhe Media collated and found that many foreign financial institutions and listed companies have successively invested in virtual currency businesses.


Among them, Tesla CEO, Elon Reeve Musk, is the epitome of many institutional investors. On January 29 of this year, he added "#bitcoin" to his Twitter bio. In the next hour, the price of Bitcoin surged by 20%, breaking through $37,000. Tesla bought $1.5 billion in bitcoin on February 8, which once again drove the price of bitcoin up by 16%. However, on May 13, Musk announced on Twitter that Tesla refused to accept Bitcoin payments because Bitcoin mining consumes energy and pollutes the environment. Bitcoin fell by more than $10,000 that day.

In addition, several foreign payment platforms have also launched bitcoin payment or transaction services. For example, Paypal, a third-party payment provider in the United States, announced in October 2020 that it supports cryptocurrency payments; in February 2021, the international financial giant MasterCard also listed Bitcoin as a "selected" cryptocurrency, promising to open Bitcoin’s payment function directly within the year.

The fundamental reason for institutional investors to enter the game is that the Federal Reserve pumped a lot of liquidity to rescue the market under the epidemic." Lu Xiaoming, the former editor-in-chief of blockchain media, pointed out in an interview with Guhe Media, "Because of the oversupply of the US dollar, many institutions hold a large amount of number at the same time, the valuation of US stocks is too high. So, institutional investors choose Bitcoin to allocate assets against risks." In March 2020, the Federal Reserve lowered interest rates to 0-0.25%, maintaining the interest rate level after the financial crisis.


The "Panoramic Map of China's Bitcoin Industry" released by Qianzhan Industry Research Institute in 2019 pointed out that, different from the foreign investment boom in Bitcoin, China's Bitcoin industry chain mainly focuses on upstream mining and production of Bitcoin. In the mining machinery manufacturing industry, three leading companies in China have already accounted for more than 90% of the global industry, but the middle and lower reaches of the industry are subject to strict supervision, restricting investment in Bitcoin.


At the same time, according to the "Global Bitcoin Development Research Report" released by Evergrande Research Institute in 2019, 80% of the world's Bitcoin transactions come from China, but 80.77% of China's Bitcoin investors are for short-term profit. Only 13.81% of investors plan to hold Bitcoin for a long time.

Is the era of strict supervision coming?


Since May 18, China has successively introduced policies to tighten the supervision of cryptocurrencies: on May 18, the Inner Mongolia Development and Reform Commission set up a reporting platform for virtual currency "mining" companies; on the same day, China Internet Finance Association, China Banking Association, China Payment and Clearing Association issued the "Announcement on Preventing the Risk of Hype in Virtual Currency Transactions"; on May 21, the Financial Commission of the State Council demanded to crack down on Bitcoin mining and transactions, and resolutely prevent the transfer of individual risks to the social field; on May 26, the Inner Mongolia Development and Reform Commission issued solicit opinions on eight measures to resolutely crack down on and punish virtual currency "mining" behaviors.


“The listing of Coinbase, the largest cryptocurrency exchange, on NASDAQ in April this year has stimulated countries to step up regulation of virtual currencies, and money laundering will be focused on prevention.” Lin, a former audit commissioner at JPMorgan Chase, pointed out in an interview with Guhe Media.


Although transparent blockchain technology is used for bitcoin transfers, it does not collect personal information when opening an account wallet, but only requires an email address, so it cannot be cross-certified with the actual account owner, leaving a gray area for money laundering.


To curb money laundering, five ministries and commissions including the People's Bank of China issued a notice on "Preventing Bitcoin Risks" as early as 2013, emphasizing that financial institutions and payment institutions are not allowed to provide customers with Bitcoin-related services. In 2017, initial coin offerings (ICOs) and onshore cryptocurrency trading were banned. This year it is even more strictly prohibited to provide any business related to virtual currency.


The Supreme People's Procuratorate and the People's Bank of China announced a typical case of virtual currency money laundering in April. After her ex-husband absconded abroad on suspicion of fund-raising fraud, the defendant "laundered" the illicit money into bitcoins with an amount exceeding 900,000 yuan and provided them to her ex-husband who was abroad. In the end, the defendant was sentenced to two years in prison and fined 200,000 yuan for money laundering.


"However, Bitcoin and its blockchain-based technology have the characteristics of decentralization and anonymity. The platform does not have user information, which poses a challenge to the traditional government-centralized supervision methods." Lin emphasized this in the interview. "In China, there is no specific law to regulate virtual currency; compared with foreign countries, the regulatory measures adopted by our country are generally more conservative and strict.”


Li Bin, the Director General of the Macro-Prudential Management Bureau of the People's Bank of China, publicly stated on April 20th that the digital China Yuan pilots, also based on blockchain technology, have been launched in Beijing, Shanghai, Changsha, and Shenzhen, but the pilot is still in internal closed testing, and mainly used to replace cash in circulation to prevent impact on commercial banks and the overall financial ecology.


Development economist Tang Weichen pointed out in his paper "Policy and Supervision Suggestions on China's Implementation of Blockchain Application" published in December 2020: China's promotion of digital China Yuan and blockchain applications is difficult how to supervise decentralized blockchain, such as determining the legal nature of virtual assets, clarifying the identity of investors, and unifying the infrastructure of blockchain protocols. At the same time, the cryptocurrency wallet real-name system and exchange license system proposed by the United States is also worthy of reference by Chinese regulators.



Bitcoin's two big ups and downs: 2017-2021


From $3.6 per coin in 2011 to about $36,000 per coin in June 2021, Bitcoin has increased by 10,000 times in ten years, and even reached 15,000 times. The sprint process from the low of $1,000 to the peak occurred during the two sharp price fluctuations in 2017-2018 and 2020-2021.

2017-2018: Loose regulation and surging investment


In 2017, Bitcoin rose from a yearly low of $789 on January 11 to a peak of $18,674 on December 18. In September of that year, it remained at the level of $6,400, and it was not until the beginning of October that the price curve showed a turning point of "vertical take-off".


But after peaking in December, Bitcoin plummeted 45% to less than $11,000 per coin. Although it climbed back to $15,000 after the callback, it did not last. After March 2018, Bitcoin fluctuated around $7,000 and continued until the beginning of 2020.


Unlike 2013, when Bitcoin only broke through $1,000 at its peak, the peak value in 2017 was nearly $20,000. The huge profit margins have strongly attracted speculative retail investors. Vanda Research, a research company that tracks retail transactions, pointed out in a report that the number of bitcoin wallets in the virtual currency trading market increased by 26% in 2017.


Ren Zeping, Dean of Evergrande Economic Research Institute, published his paper "Bitcoin: Currency Revolution or Speculative Bubble?" in May 2018”. He stated that speculative demand is the driving factor for this round of Bitcoin surge, while loose regulatory policies provide important external conditions.


Although the People's Bank of China jointly issued two announcements with seven departments in September to strengthen the supervision of cryptocurrencies, strictly prohibiting domestic ICOs from issuing cryptocurrencies to finance enterprises, and requiring domestic virtual currency trading platforms to complete the clearance work before the end of the month, Bitcoin has gone up since many countries have introduced loose regulatory policies. In September, Japan authorized the Bitcoin trading platform Coincheck to operate. The U.S. Securities Exchange and Futures Trading Commission stated in October that some cryptocurrencies can be regarded as securities in the traditional financial system, paving the way for Bitcoin to integrate into the traditional financial system.


The world's largest futures exchange, the Chicago Mercantile Exchange, decided to launch bitcoin futures at the end of 2017. On the same day that this decision came into effect, the price of bitcoin reached a peak of $18,674. According to data from Coinbase, a virtual currency trading platform, in October and November alone, the number of registered accounts on the platform increased by 8.4 million year-on-year to 13.3 million. In December, at the peak of Bitcoin transaction volume, 125,000 transactions were waiting to be confirmed by miners.


But within five days of peaking, Bitcoin plummeted by nearly a third to $11,000. In an interview with the Securities Times, Xiao Lei, a digital currency analyst, believes that the three-month rising market has increased the selling pressure on the market, and there are no new positives for Bitcoin, and investors tend to sell to lock in profits.

2020-2021: "Institutions" make a big bull market, and supervision is tightened


After a two-year bear market in 2018 and 2019, Bitcoin bottomed out at $4,705 in March during the 2020 pandemic but has since ushered in a year-long bull market.


According to the latest position data from Bitcoin Treasuries, most of the 37 institutions holding bitcoin positions have significantly increased their positions in the second half of 2020. Among them, the holdings of the top 10 institutions increased from 478,000 at the beginning of the year to 1.185 million at the end of the year, an annual increase of 126%. In December 2020, Bitcoin also regained its all-time high of $20,000 in 2017, with an annual increase of more than 300%, while gold rose by only 20% that year, and the US Nasdaq index rose by only 40%.


At the beginning of 2021, Tesla and Meitu Xiuxiu successively announced that they would purchase 1.5 billion and 100 million U.S. dollars in bitcoin, driving it to break through the $30,000 mark, and set a historical record of $64,829 in April, double the price from the beginning of the year.

However, the negative impact of stricter regulation since May has caused Bitcoin to plummet again.


Governments of various countries have intensively released signals to strictly regulate virtual currencies in May. The People's Bank of China first issued a document on May 18 to ban bitcoin-related businesses, and the governments of the United States, South Korea, and Russia followed suit to tighten supervision. The cryptocurrency market plummeted in response, with Bitcoin falling as low as $29,000 at one point, erasing all of its gains for 2021. As of the date of writing, the price of Bitcoin is still floating at a low level of $36,000, which is only half of the historical high in April.


However, in this context, there are still institutional investors bucking the trend and increasing their positions in cryptocurrencies such as Bitcoin. Ark Investments purchased a $17 million bitcoin trust on May 24, according to a report filed with the U.S. Securities and Exchange Commission by Ark Investments. In addition, MicroStrategy, the institution with the largest Bitcoin holdings, also announced on June 7 that it will issue bonds to raise $400 million to increase Bitcoin. This is the company's second public issuance of bonds to buy Bitcoins in half a year.

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